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IMPERFECT COMPETITION

IMPERFECT COMPETITION. MONOPOLY. GENERAL DESCRIPTION. firm produces differentiated products č firm can set its price by itself, the imperfect competitor demand curve slopes downward – in order to be able to sell the additional unit of production, firm is forced to down the price .

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IMPERFECT COMPETITION

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  1. IMPERFECT COMPETITION MONOPOLY

  2. GENERAL DESCRIPTION • firm produces differentiated productsč firm can set its price by itself, • the imperfect competitor demand curve slopes downward – in order to be able to sell the additional unit of production, firm is forced to down the price.

  3. Varieties of Imperfect Competition • organizational characteristics of an industry, of which the most important are: • number and size of the sellers, • extent of concentration and collusion among the firms, • degree of homogeneity or heterogeneity of their products

  4. COST CONDITION the existence of economies of scale of declining average costs represents the main reasons lying behind imperfect competition BARRIERS TO COMPETITION Legal restrictions: Patents Entry or exit restrictions (f. e. tariffs or quotas on foreign producers) Product Differentiation Sources of Market Imperfections

  5. Another factors leading to imperfections of market • insufficient information of market participants, • the ownership of an important factor of production by one firm only, • the state interventions into market mechanism (f. e. price regulation of some products) • political events (f. e. foundation of international trust of oil exporters in sixtieth OPEC).

  6. MEASURING MARKET POWER • Concentration Ratio – the percent of total industry output that is accounted for by the few largest firm - (doesn’t reflect the difference if the 100 % is divided between four firms equally or if the most part represents only one firm) • The Herfindahl Index - reflect the effect of the size differences èequals to the sum of the squared market shares in percentage terms: H = Σ Si2 = S12 + S22 + ... - when the industry is a pure monopoly, the H = 10 000, while if an industry is perfectly competitive, H = 0.

  7. ANALYSIS OF MONOPOLY • a single seller with complete control over an industry • demand sloping downwardč P >MR • the maximum-profit price and quantity of a monopolist comes where its marginal revenue equals its marginal cost: MR = MC

  8. Graphical Analysis of Monopoly

  9. THE COST AND CONTROL OF MONOPOLY • monopoly doesn’t produce output up to the point where the social cost (measured by MC) is equal to the value of the good to consumers (measured by P = MU) because to do so would require lowering P to all consumers, which would lose the monopolist some profit

  10. Social cost of Monopoly

  11. INTERVENTION STRATEGIES • Taxes – by taxing monopolies, a government can reduce monopoly profits, thereby softening some of the socially unacceptable effects of monopoly • Price controls – represents centralized way of setting the price • Government ownership – usage of this kind of regulation depends on wider contexts (political system, culture, history, tradition ..) • Antitrust policy – laws that prohibit certain kinds of behaviour (such as firms joining together to fix prices) or curb certain market structures (such as pure monopolies) • Economic regulation – allows specialized regulatory agencies to oversee the prices, outputs, entry and exit of firms in regulated industries

  12. Tasks: 1. Calculate the optimal output of monopoly and the amount of the monopoly profitknowing: 2. Explain the mistakes in thinking: a) Monopoly can set the price as high as it wishes, b)The price control of monopoly leads always to decline in the profit of monopoly. 3. Calculate the Herfindahl index for the market structure, where the market is equally fragmented amongst four companies.

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